Monetary Policy and Inequality in the U.S

Monetary Policy and Inequality in the U.S.

Olivier Coibion

College of William and Mary

Yuriy Gorodnichenko

UC Berkeley

John Sivia

Wells Fargo

Global Interdependence Center

March 2012

Standard Explanations for Rising U.S. Income Inequality:

1. Skill-biased technical change

2. Trade globalization

3. Institutional changes, e.g. declining unionization,

deregulation/growth of financial sector

25%

30%

35%

40%

45%

50%

1917

1922

1927

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

To

p 1

0%

In

co

me S

hare

Including capital gains

Channels from Monetary Policy to Consumption/Income Inequality

• Heterogeneous wage/employment effects across population:

a) different complementarities with capital for skilled/unskilled

b) different industry sensitivity to interest rate changes (e.g. durables vs.

nondurables, cost channels and liquidity constraints)

c) insiders vs. outsiders in the firms (e.g. seniority)







• Income/consumption composition effects:

a) importance of labor earnings vs. financial income vs. business income vs.

transfers

b) importance of durable goods purchases and other interest-sensitive expenditures









transfers


• Wealth effects on consumption and labor supply decisions:

a) real interest rate increase is a transfer from borrowers to savers

b) different portfolio allocations will also affect wealth outcomes









transfers


• Wealth effects on consumption and labor supply decisions:

a) real interest rate increase is a transfer from borrowers to savers

b) different portfolio allocations will also affect wealth outcomes

We want to assess the empirical importance of these channels.

Do monetary policy changes meaningfully affect income/consumption inequality?

How we do this:

• Step 1: Identify “Unusual” Changes in Monetary Policy as suggested by Christina

and David Romer

Fed Funds changes that deviate from “usual” behavior

1980 1985 1990 1995 2000 2005

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

How we do this:

• Step 2: Measure income and consumption inequality across households in the

United States over time using the Survey of Consumer Expenditures

Household Labor Earnings

How we do this:



Household Total Income = Household Labor Earnings

+ Household Business Income

+ Household Financial Income (bonds, dividends)

+ “Other” Household Income

(Soc. Sec., UE benefits, alimony, pensions, welfare, etc…)

How we do this:








Household Consumption = Purchases of Non-Durables and Services

+ Purchases of Durables (furniture, TV’s, etc…)

How we do this:








Household Consumption = Purchases of Non-Durables and Services

+ Purchases of Durables (furniture, TV’s, etc…)

Household Expenditures = Household Consumption

+ Mortgage Payments (if any)

+ Auto Purchases (if any)

+ Other Expenditures (education, medical, house expenses, …)

How we do this:



This distribution of households does NOT include the 1%.

Gin

i C

oeff

icie

nt

1985 1990 1995 2000 20050.3

0.32

0.34

0.36

0.38

0.4

0.42

0.44

0.46

0.48

0.5

Recessions Income Earnings Expenditures Consumption

How we do this:

• Step 3: Determine what happens to income and consumption along different parts of

the distribution after monetary policy shocks.

The Effects of Monetary Policy Shocks by Percentile

Monetary policy affects labor earnings differently across the distribution.

2 4 6 8 10 12 14 16 18 20-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06Income Inequality

2 4 6 8 10 12 14 16 18 20-0.1

-0.05

0

0.05

0.1Earnings Inequality

2 4 6 8 10 12 14 16 18 20-0.1

-0.05

0

0.05

0.1

0.15Expenditure Inequality

2 4 6 8 10 12 14 16 18 20-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08Consumption Inequality

P10

P25

P50

P75

P90


Effects on consumption across the distribution are very similar.

2 4 6 8 10 12 14 16 18 20-0.08

-0.06

-0.04

-0.02

0

0.02

0.04


2 4 6 8 10 12 14 16 18 20-0.1

-0.05

0

0.05


2 4 6 8 10 12 14 16 18 20-0.1

-0.05

0

0.05

0.1


2 4 6 8 10 12 14 16 18 20-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06


P10

P25

P50

P75

P90


Effects on total income are smaller for 10th, 25th percentiles, similar for 50th and above.

2 4 6 8 10 12 14 16 18 20-0.08

-0.06

-0.04

-0.02

0

0.02

0.04


2 4 6 8 10 12 14 16 18 20-0.1

-0.05

0

0.05


2 4 6 8 10 12 14 16 18 20-0.1

-0.05

0

0.05

0.1


2 4 6 8 10 12 14 16 18 20-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06


P10

P25

P50

P75

P90

Why does income at low percentiles decline by less than earnings?

Quintiles by

consumption of

nondurables and

services

Share of income source Ratio of mean consumption of

nondurables and services to mean

consumption of nondurables and

services in the 3rd

quintile

Labor

Earnings Business Financial Other

(1) (2) (3) (4) (5)

Panel A: 1980s

1

2

3

4

5

Panel B: 1990s

1

2

3

4

5

Panel C: 2000s

1

2

3

4

5

Why does income at low percentiles decline by less than earnings?

Quintiles by

consumption of

nondurables and

services

Share of income source Ratio of mean consumption of

nondurables and services to mean

consumption of nondurables and

services in the 3rd

quintile

Labor

Earnings Business Financial Other

(1) (2) (3) (4) (5)

Panel A: 1980s

1 0.352 0.022 0.112 0.515 0.42

2 0.588 0.040 0.112 0.260 0.73

3 0.694 0.057 0.096 0.153 1.00

4 0.762 0.059 0.081 0.098 1.34

5 0.767 0.088 0.078 0.067 2.18

Panel B: 1990s

1 0.380 0.020 0.106 0.494 0.43

2 0.597 0.040 0.097 0.267 0.73

3 0.704 0.050 0.086 0.160 1.00

4 0.770 0.056 0.071 0.103 1.35

5 0.773 0.082 0.076 0.069 2.27

Panel C: 2000s

1 0.435 0.019 0.086 0.460 0.43

2 0.653 0.029 0.085 0.234 0.73

3 0.740 0.037 0.072 0.151 1.00

4 0.801 0.042 0.065 0.092 1.36

5 0.812 0.051 0.071 0.065 2.32

Government transfers dampen the effects of shocks on low-income households.


Effects on expenditures are similar to consumption, but display disproportionately

large increases in expenditures for those at the high-end of the distribution.

2 4 6 8 10 12 14 16 18 20-0.08

-0.06

-0.04

-0.02

0

0.02

0.04


2 4 6 8 10 12 14 16 18 20-0.1

-0.05

0

0.05


2 4 6 8 10 12 14 16 18 20-0.1

-0.05

0

0.05

0.1


2 4 6 8 10 12 14 16 18 20-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06


P10

P25

P50

P75

P90

Why do expenditures at high percentiles rise so much?

Quintiles by

consumption of

nondurables

and services

Shares in consumption

Selected shares in total spending Ratio of total

spending to

consumption of

nondurables and

services

Nondurables Durables Services

Interest

sensitive

expenditures

Mortgage

payments

Purchases

of new

vehicles

(1) (2) (3)

(4) (5) (6) (7)

Panel B: 1990s

1

2

3

4

5


Quintiles by

consumption of

nondurables

and services

Shares in consumption

Selected shares in total spending Ratio of total

spending to

consumption of

nondurables and

services

Nondurables Durables Services

Interest

sensitive

expenditures

Mortgage

payments

Purchases

of new

vehicles

(1) (2) (3)

(4) (5) (6) (7)

Panel B: 1990s

1 0.655 0.059 0.285

0.113 0.021 0.015 2.13

2 0.637 0.084 0.279

0.175 0.050 0.034 2.08

3 0.631 0.096 0.273

0.215 0.074 0.040 2.03

4 0.613 0.109 0.278

0.246 0.094 0.046 2.02

5 0.567 0.116 0.317

0.267 0.100 0.051 1.91

There is no dramatic difference in the allocation of consumption or expenditures for those

at the upper end of the distribution relative to previous quintiles.


Redistributive wealth effects: do we see differential response in expenditures of savers

relative to borrowers?


There is no important difference in long-run total income across groups but…

5 10 15-0.3

-0.2

-0.1

0

0.1

0.2Total income

5 10 15-0.6

-0.4

-0.2

0

0.2

0.4Earnings

5 10 15-0.2

-0.1

0

0.1

0.2Total expenditures

5 10 15-0.1

-0.05

0

0.05

0.1Consumption

CI Low net-worth High net-worth Everybody else


High net-worth households have large increases in consumption and expenditures,

consistent with positive wealth effect of redistribution.

5 10 15-0.3

-0.2

-0.1

0

0.1

0.2Total income

5 10 15-0.6

-0.4

-0.2

0

0.2

0.4Earnings

5 10 15-0.2

-0.1

0

0.1

0.2Total expenditures

5 10 15-0.1

-0.05

0

0.05

0.1Consumption

CI Low net-worth High net-worth Everybody else

The contribution of “unusual” monetary policy to U.S. inequality


“Unusual” monetary policy actions helped reduce income and earnings inequality from

the mid-1990s to late 2000s.

Income Inequality

1985 1990 1995 2000 2005

-0.02

0

0.02

0.04

0.06

0.08

0.1

Earnings Inequality

1985 1990 1995 2000 2005

-0.05

0

0.05

0.1

Expenditure Inequality

1985 1990 1995 2000 2005

-0.04

-0.02

0

0.02

0.04

0.06

Consumption Inequality

1985 1990 1995 2000 2005

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

Recessions contribution of MP shocks actual


but contributed to cyclical fluctuations in consumption inequality.

Income Inequality

1985 1990 1995 2000 2005

-0.02

0

0.02

0.04

0.06

0.08

0.1

Earnings Inequality

1985 1990 1995 2000 2005

-0.05

0

0.05

0.1


1985 1990 1995 2000 2005

-0.04

-0.02

0

0.02

0.04

0.06


1985 1990 1995 2000 2005

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

Recessions contribution of MP shocks actual

What about the Volcker disinflation?


Volcker disinflation did not contribute much to income or earnings inequality…

Income Inequality

1985 1990 1995 2000 2005

-0.02

0

0.02

0.04

0.06

0.08

0.1

Earnings Inequality

1985 1990 1995 2000 2005

-0.05

0

0.05

0.1


1985 1990 1995 2000 2005

-0.04

-0.02

0

0.02

0.04

0.06


1985 1990 1995 2000 2005

-0.02

0

0.02

0.04


but likely contributed to the rising expenditure

and consumption inequality of the 1980s.

Income Inequality

1985 1990 1995 2000 2005

-0.02

0

0.02

0.04

0.06

0.08

0.1

Earnings Inequality

1985 1990 1995 2000 2005

-0.05

0

0.05

0.1


1985 1990 1995 2000 2005

-0.04

-0.02

0

0.02

0.04

0.06


1985 1990 1995 2000 2005

-0.02

0

0.02

0.04

What about in recent years?


Source: San Francisco Fed

Since 2009, the Fed has been unable to lower interest rates the way it normally would

have: monetary policy has not been able to supply the typical expansionary impetus

for this stage of the business cycle.

-2

-1

0

1

2

3

4

5

6

7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Actual FFR Predicted Values

FFR Target Range


Source: San Francisco Fed

Since 2009, the Fed has been unable to lower interest rates the way it normally would

have: monetary policy has not been able to supply the typical expansionary impetus

for this stage of the business cycle.

So income and consumption inequality are most likely higher than they would have been

had the Fed been able to respond in an unconstrained fashion.

-2

-1

0

1

2

3

4

5

6

7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Actual FFR Predicted Values

FFR Target Range

Documents

Monetary Policy and Inequality in the U.S